Sovereign International Daily Market Report
Euro hammered as Credit Suisse fears rock financial markets
Summary:
The fallout from the collapse of SVB and Signature Bank last week, the two largest US bank failures since the financial crisis, continued to rock financial markets yesterday.
Attention among investors shifted across the Atlantic on Wednesday, as the spotlight fell on Swiss bank Credit Suisse following some rather concerning revelations in its annual report the day prior. The report noted that there had been ‘material weaknesses’ in controls over financial reporting, reigniting fears of contagion and the possibility that the collapse of SVB was not merely a one-off, but the beginning of a wider crisis. Shares of Credit Suisse collapsed by more than 25% yesterday, while stock prices of a number of other major European banks, including Deutsche Bank, BNP Paribas and Societe Generale, were all down 7-10% or more.
Trading in the foreign exchange market exhibited clear ‘risk off’ traits on Wednesday. As tends to be the case during periods of intense market uncertainty, the notable outperformer was the safe-haven Japanese yen, which rallied against every other currency in the world. Emerging market currencies were hit hardest, particularly those in Europe, with the Hungarian forint, Czech koruna and Polish zloty among the worst performers in the world. The most noteworthy sell-off was, however, witnessed in the euro, which fell by around 2% against the US dollar during the course of London trading - the worst daily performance in the common currency since the onset of the COVID-19 pandemic in March 2020.
The European banking system is more tightly regulated than its US counterpart, which should be allaying fears of broader ramifications. As far as Credit Suisse is concerned, it is difficult to ascertain whether the collapse in the share price is driven by actual balance sheet issues, or merely sheer panic among market participants, which are now placing around a 50/50 implied probability of default according to credit default swaps. At any rate, the euro is now being hit on two fronts, as not only are markets fearing an escalation in the banking crisis, but they are also scaling back bets in favour of higher European Central Bank rates ahead of this afternoon’s Governing Council meeting.
领英推荐
The ECB are now in an unenvious position. On the one hand, sky-high core inflation and resilient economic data warrants further aggressive tightening, although on the other, financial market stability in the common bloc is at stake. Ultimately, this will no doubt trigger caution among rate-setters today, and it appears likely that the ECB will plump for a ‘standard’ 25bp hike, rather than the 50bp that had been heavily telegraphed in the past few weeks. Markets have adjusted their rate expectations in the past 24 hours or so and, at the time of writing, swaps are pricing in around 30bps of hikes for today’s meeting, so a 25bp move would not be a complete disaster for the euro, which is already back trading just shy of its 2023 lows.
The Federal Reserve and Bank of England will face similarly challenging conundrums when they convene for their March policy meeting next Wednesday and Thursday respectively. Following a brief respite, markets are now back pricing in rate cuts from the Fed at its July meeting, with more than 70bps of cuts now seen by year-end. This should be weighing on the US dollar, but risk aversion is clearly dominating the narrative in markets, and helping drive the safe-haven greenback higher against almost every other currency.
Market Report provided by Ebury
Please contact us for any FX needs you may have +44(0)203 817 3700 / [email protected]
Whether you are a large corporate trading millions on a weekly basis, a small to medium sized enterprise trading tens of thousands on a monthly basis, or just a private individual with a one-off amount to transact for a property purchase or overseas investment, we will provide you with the most simple, cost effective route for your foreign exchange payments.